In last article we saw example of Meme Inc, a toy firm and how it got funds from the share market. Like that case, in share market once an IPO is listed, the buying and selling begins in the secondary market or share market or just, “Market“. This pull and push of buy and sell of a share determines in which direction the share price will move. As an investor or trader, our task is to ride this tide, or on some rare times go opposite this tide and in the end focus on one thing – how to buy a share at low price and sell at high price to earn the profit.
In share market there are 2 types of people (or sentiments), who pull or push the market in one direction or other. The people who think and believe that market will go up and share prices will rise are called as BULLS while those who think and believe that share price will go down and price fall are called as BEARS. both of these players exist all the time in the market and depending on their sentiment, the share market as a whole grows or falls.
The bear(ish) or bull(ish) are more of trends, it builds up depending on overall market sentiments. As per visible sentiments you are supposed to act and dance to the playing tune – be a Bull in rising market with a caution and bear in Falling market with a little caution. Yes, this caution matters and it can make a huge difference because the trends can reverse anytime and you need to be in the market at that time. Don’t worry, its not a rocket science, with little experience even you can do it.
As a matter of fact everyone invests in the share market with only intention of growing their money, growth then becomes a matter of time horizon that is how long you can stay invested. Those who buy share considering the future prospects of the company are called as Investors. The investors stay invested in the share for longer period – atleast for more than a year. On the other hand, there are traders who enter the market just to earn quick higher returns, they have target price and once that price is achieved they exit such stock. They invest in shares depending on the tide or mood of the market. You can be an investor or trader, it depends on your need and patience.
So what is the best time to begin investing? answer is mostly – as soon as you can. Market doesn’t wait for anyone, it rides on its own momentum. You may wish to enter the market at particular price, but then its very difficult to time the market. Thus its better to begin small and add more as your understanding of market will grow. To be sure about this decision and expand your understanding, you need to know some terminologies of trading. (We are going to learn about them in next part). with that said, once in a while a good company goes public where you can subscribe to such IPO and hold them in your portfolio for long term gains.
In case of IPOs, Until recently mostly the well established companies with good future prospect chose to go public. But the current market of 2017-18 is in frenzy and has seen most number of IPOs ever and thus you need to be careful while investing in IPO. A good IPO can fetch good return but then they can fall also while listing – this aspect is little unpredictable. Eg. The IPO of Dmart avenue supermarket was offered for Rs. 299 max. but on listing day it got listed for whopping Rs. 610 and then went on to become a four digit stock within 5-6 months. On other had, The IPO of well established General Insurance corporation of India was offered at Rs 912 but it got listed at Rs. 850 and fall further to Rs. 770.
We can make informed decision based on our own understanding of market with knowledge of some basic terminology of market. This vocabulary also helps in understanding the analysis presented by experts on CNBC TV 18. The trading experts share their views and opinion in public domain, news papers and on websites like http://www.moneycontrol.com/ or https://www.valueresearchonline.com we can use this data to enter/buy or exit/sell from a market. Infact this information shared by experts is also good enough to get going on in trading. JUST DON’T REACT TO THE TIPS YOU RECEIVE IN SMS.
before I conclude this article, let me revisit the IPO of our hypothetical company Meme inc. Understand the concepts in share holding at corporate level, this information is not required for trading and you can jump to next article The terminology of Market. But its good to know what a share actually means.
when a company decides to issue shares, the owners/ management of the company has to authorize shares i.e. decide how many shares will be created in exchange of either asset or cash. This implies that these shares will reflect some value directly reflecting upon the real assets of the company. This is the total number of shares and a company publicly issues such shares only once mostly via IPO.
Not all of these shares will be available for trading. A part of these shares will be sold via IPO to investors, some shares will be offered to the employee of the company. and a big chunk of shares will be kept by Owner of the company and they are called as the promoters of the company. The part of shares with public, institutions like banks, mutual funds and with employee of the company will together constitute the outstanding shares. Eg. in case of Dmart or avenue supermarket, the owner of Dmart company Mr. Damani holds 39.4 percent in Avenue Supermarts while his family owns another 42.8 percent.
As you can see, 82.2% of the shares are held by the promoters of the company.And we the general public or retail investors only have 9.6% of total shares. The other key investors are, NBFC, Mutual funds and foreign investors they are the real investor – investors who bring big money into the stock market and push the price up or sell big chunk of their holding to push stock price down.
now see this equation – The total outstanding shares i.e. sumtotal of shares with public + foreign investors + banks and mutual funds equals to 17.8%. This is the number of shares that are available for trading as outstanding shares. there are total 625 million such shares and if you multiply there shares with current stock price Rs. 1245 of Avenue supermarket then you get the market capital of Dmart/Avenue supermarket which is Rs. 780.19 Billion. Imagine 82.2% of that shares with Mr. Damani and his family – with each Rs 1 increase in the stock price, promoters of Dmart become multifold rich. That is how Bill gates of Microsoft and JEff Bezos of Amazon are rich!
In next article we will go through some terminologies to understand the jargon of trading. don’t worry about the jargon, they are just weird words for usual stuff.
Next -> The terminology of Market. : Equity related Terminologies
Here is a summary of your Journey to trading,
- Basics of Shares, I.e. this article
- Equity Related terminologies
- Some technical stuff that you must know
- Some cautions and introduction to trading platform
- Some does and don’t of trading.